Pension Gain Estimates Too High?

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CFOs won’t get the same bottom-line boost from pension fund gain assumptions this year that they got in 2002. That’s because new federal guidelines will force companies to be more conservative about their rosy investment return sceanrios.

Starting later this year, regulators will audit the financial statements of any company that exceeds a 9 percent proposed standard, notes a report in The New York Times. If a company’s finance team can’t convince the auditors that the investment return assumption is legitimate, the company will be forced to restate earnings.

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That could lead to a lot of restating. According to new research released by actuarial firm Milliman USA, 45 of the nation’s largest companies used an annual rate-of-return of more than nine percent. Eight companies estimated investment returns of 10 percent or more.

The average assumed rate for 2002 was an 8.92 percent investment return. But Milliman Principal John Ehrhardt expects companies to lower their assumptions for 2003, predicting an average of 8.5 percent.

According to the report, Berkshire Hathaway only assumed a 6.5 percent rate-of-return, the second lowest of the 100 companies surveyed. Only Merrill Lynch estimated lower, at 6 percent.

At the other end of the spectrum, Northwest Airlines expected its pension fund to return 10.5 percent on investments last year. In actuality, the fund lost 13.5 percent, according to The Times.